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China's One Belt, One Road initiative: Overview and implications

The high-profile Belt and Road Forum just concluded in Beijing, with representatives from over 100 countries in attendance. While details for the China's One Belt, One Road or OBOR remain vague, the overarching idea is to rebuild old maritime and overland trading routes between Asia, the Middle East, and Europe. In this podcast, Sebastian Lewis, S&P Global Platts Content Director for Greater China, Oceana Zhou, Platts Senior Analyst, and Paul Gruenwald, S&P Global Chief Economist - Asia Pacific, examine OBOR's potential impact on energy and commodities, how it could affect countries involved in the initiative, as well as what it means for China's economic influence on the regional and global level.

As you know the big news here in Beijing is they've just concluded a very high profile One Belt, One Road summit, which was attended by representatives from over 100 countries - including the heads of state from, you know, mainly Asian countries, but I think Russia, Turkey, and Pakistan as well were there, as well as the president of the World Bank and the managing director of the IMF. Xi Jin Ping's keynote address promised a lot more funding for this One Belt, One Road initiative. They said it adds up to more than $100 billion, which sounds like a big number to me, and that would come from various Chinese banks and multilateral institutions.

But I suppose let's get back to the beginning - what is this the One Belt, One Road policy initiative, and what would be its impact?

Oceana Zhou: The overarching idea is to rebuild the old marine and overland trading routes - the "21st Century Maritime Silk Road" down to Southeast Asia and to the Middle East and Europe; the "Silk Road Economic Belt" or the old Silk Route through Central Asia through Turkey and Europe. Now in English they call it "Belt and Road."

SL: I see. And you know, what do you actually mean though? Sure, it's an initiative. They're going to rebuild these kind of old trade routes. But in concrete terms, what does this mean?

Paul Gruenwald: I think it's two things. First, it's more evidence of China's rising role in the global economy so China has launched these various big initiatives. One's the Asia Infrastructure Investment Bank, and now we have One Belt, One Road. But it's really about connectivity. As you said Sebastian it's about connecting or reinvigorating all of these old trade routes that have existed for quite a long time and let's be honest the Chinese have demonstrated they're very good infrastructure so building out various rail lines, freight lines, ports, dry ports, et cetera - this is something where you know China could naturally take the lead in this part of the world.

SL: I think, you know, this definitely needs more infrastructure in Asia, but how is this going to be funded? I mean does One Belt, One Road include a lot of funding? You know $100 billion, which sounds like a big number to me, but what do you make of it Paul?

PG: It is a lot of money but if you scale it and put it against China's annual GDP, it comes out to about 1%. But one of the reasons I think that Xi Jin Ping had a big conference this weekend was to enlist various investors whether it's multilateral funding, bilateral funding. The projects as you know cover a large number of countries so I think there's going to be plenty of investment opportunities as long as these various projects clear the various hurdles of the funders.

SL: And is therefore the Asia Infrastructure Investment Bank part of One Belt, One Road? Is it separate? There's also the Silk Road Fund. There seems to be a whole load of competing institutions here in terms of lineup to lend money.

PG: Yeah, well, let me start. I was at the Asian Development Bank meetings last week and Jin Liqun was there, the president of the AIIB. He made it very, very clear that the AIIB is distinct from the One Belt, One Road. It is not the financing mechanism for One Belt, One Road. He did say that the AIIB would be looking at various infrastructure projects under this initiative. He certainly did not rule out investing in some infrastructure projects under One Belt, One Road, but he was very clear that these are distinct initiatives, that AIIB as a multilateral development bank focused on infrastructure, while One Belt, One Road is a Chinese government initiative.

SL: Okay. So Oceana, turning to actually the most visible aspect of this project, can you kind of talk us through what sort of things have been developed as part of the One Belt, One Road policy? What kind of projects, infrastructure and energy investments are we seeing?

OZ: Actually, they are mainly grand projects that can support trade. Infrastructure on roads, ports, pipelines, et cetera, which are actually not very new, such as the Pakistan Economic Corridor, linking China's Xinjiang to Pakistan, and also the port investment in Greece by Chinese company COSCO, and also the oil and gas pipeline to link China with Central Asia and Russia.

Recently, the most interesting thing should be the China-Myanmar crude oil pipeline, which finally started operation just recently, although it has been ready since January 2015. It was designed as an alternative route for China to receive crude oil from the Middle East and Africa, easing its dependence on Malacca Strait. But due to the power change in Myanmar and later the transaction fee issue, the pipeline did not operate until very recently, tt shipped the first barrel of crude oil to Petrochina's greenfield refinery in southwestern Yunan.

It is a typical example of a project along the One Belt route, which provide opportunities while there are also challenges like geographic, political and economic issues.

SL: I think it's worth of course remembering, I mean we always think the popular imagination is the One Belt, One Road is all about China building infrastructure, ports and kind of huge roads, railways for it to export its own goods, but it goes both ways, right?

China needs a lot of energy and part of One Belt, One Road you seem to be saying is building infrastructures to help China actually bring energy into the country. The trade goes both ways.

OZ: Yeah, and it also acts for things as well as China's domestic economic growth has been slowed down, it's likely a way for the country to export its industry overcapacity to other countries in need with some kind of financial support and then exchange resource as a return. In some instance it can help to push energy and commodity consumption in general.

SL: Yeah, I'm always a bit skeptical about this idea that it helps China kind of sort out industrial overcapacity problem. Paul, do you have any thoughts on this at all?

PG: Yeah well I think one level that makes sense. My reading of that is the amounts we're talking about for One Belt, One Road are just too small relative to the size of the Chinese economy. So I find it hard to believe that building out this initiative is going to help China export a huge percentage of its overcapacity in these various sectors.

I think to the recipient country these projects are going to be relatively large. We've already mentioned Myanmar, we want might want to throw in Pakistan as well. While these projects might be small relative to the size of the Chinese economy, they will be quite sizable and obviously beneficial to the recipient countries. So that's probably a better lens through which to look at this rather than China exporting as overcapacity.

SL: And actually sort of coming back a bit because of geopolitics around this. You know the US withdrawing from TPP, the Trans Pacific Partnership, which is kind of Obama's era's initiative in Asia, what does this mean China's influence in the region and globally?

PG: Yeah, again, we talked about this at the Asian Development Bank meetings last week. It's clearly the case that the US has withdrawn a bit from its previous position supporting the multilateral institutions and arrangements. That doesn't automatically mean that China sort of takes control or leadership in all of these areas.

Let's remember this is largely a regional initiative - it's Southeast Asia, South Asia and Central Asia, a little bit of Europe in there, but it certainly helps China status. I think over time we're going to get some co-funding and participation from the advanced economies as well, but I don't think it you know allows China to kind of leapfrog the US into the global leadership position. But it clearly has geopolitical benefits for China. I think that's pretty clear.

SL: But we'll have to wait and see how this all plays out, especially geopolitics. Well, thank you very much Paul and Oceana for your insights there. And sadly that's all we have time for this month for Brussels Beijing. Thanks very much for listening to us here in Asia. We look forward to seeing you next time.

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